8 Commonly Used Mutual Fund Terms That An Investor Should Be Aware Of
If you are new to the world of investing, you must know about the various terms related to mutual funds.
Over time, mutual funds have gained a lot of popularity for being a great investment option to grow your wealth. However, if you are new to the world of investing, you must know about the various terms related to mutual funds. This will help you make the right investment decisions.
Let’s understand some of the most common mutual fund terms that you should be aware of.
Asset Management Company (AMC)
An asset management company is an institution that manages the funds invested by various investors. AMCs in India must register themselves with the Securities and Exchange Board of India (SEBI) and follow the SEBI guidelines to manage mutual funds. The AMC is responsible for collecting money from investors and investing it in various mutual funds. They are also responsible for monitoring the performance of the mutual funds and distributing the returns to the investors.
Asset Under Management (AUM)
A mutual fund scheme’s asset under management refers to the total market value of all the assets held by the mutual fund. This includes shares, bonds, derivatives, cash, gold, etc. The AUM of a mutual fund may keep fluctuating due to the new investments and redemptions done every day.
Net Asset Value (NAV)
NAV is the value of each unit of a mutual fund scheme. This is the cost you will get for each unit of a mutual fund. A mutual fund’s NAV is obtained by dividing its asset under management by the total number of outstanding units on a specific date.
Systematic Investment Plan (SIP)
SIP or systematic investment plan is one of the most common terms that are associated with mutual funds. SIP is a method of investing your money in mutual fund schemes where you invest a specific amount in the fund at periodic intervals. SIP investments can be weekly, monthly or quarterly. Today, you can start a SIP investment in mutual funds with as little as ₹500.
In mutual funds, the load is the fee that you may have to pay when you buy or sell units of a mutual fund. There are two types of loads- entry load and exit load. Entry load is the fee payable when you purchase units of a mutual fund. Exit load is the fee payable when you sell units of a fund.
This is another frequently used mutual fund term. A benchmark index is a standard against which you can measure the performance of a mutual fund. As per the guidelines set by SEBI, an AMC must declare a benchmark index for each of its mutual funds. You can gauge the performance of the mutual fund against the returns of the benchmark index. For example, if the benchmark index has gone up by 10% and your mutual fund has given you returns of 12%, then your mutual fund has outperformed the benchmark index. Some of the common benchmark indices are the Nifty 50 and BSE Sensex.
If you opt for the dividend option while investing in mutual funds, you will get interim payments from the AMC in the form of dividends. You must note that these dividends are not fixed and will depend on the AMCs discretion.
If you opt for the growth option while investing in a mutual fund, the AMC will not make any interim payments to you. Any interest/gains/returns from the scheme are reinvested into the mutual fund. As no interim dividends are paid under the growth option, it provides the opportunity to benefit from the compounding effect in the long run.
These were some of the most frequently used terms associated with mutual fund investments. As an investor, it is essential that you understand the meaning and implications of these terms to make informed investment decisions and achieve your financial goals.